• the inability to procure required components and raw materials;

• any downturn in the defense, aerospace, semiconductor or other markets in which we operate, which could cause a decline in selling unit prices or volume;

• reductions in military spending or changes in the acquisition requirements for military products;

• the inability to develop, introduce and sell new products or the inability to develop new manufacturing technologies;

• the failure of customers to accept our anti-tamper processing or the development of improved anti-tamper processing by competitors;

• the inability to locate appropriate purchase candidates for our discontinued operations being held for sale and/or to negotiate an appropriate sales price;

• the ability to locate appropriate acquisition candidates, negotiate an appropriate purchase price, obtain the necessary financing and integrate into our business the people, operations, and products from acquired businesses, or implement other strategic alternatives;

• changes or restrictions in the practices, rules and regulations relating to sales in international markets; and/or

• changes resulting from severe economic downturns that affect our customers, suppliers and lenders.

In addition, new factors, other than those identified in this Form 10-Q or our most recent Annual Report on Form
10-K, may emerge from time to time and it is not possible for management to predict all such factors, nor can we assess the impact of each factor on our business or the extent to which any one factor, or combination of factors, may cause actual results to differ materially from forward-looking statements. We do not undertake, and we specifically disclaim, any obligation to publicly update or revise any forward-looking statement contained in this Form 10-Q or in any document incorporated herein by reference, whether as a result of new information, future events or otherwise, except as required by applicable law. Overview of Business
We are a defense electronics manufacturer and supplier that designs, develops and manufactures innovative electronic components and systems for inclusion in high technology products for the defense and aerospace markets. Our defense electronics solutions include advanced semiconductor and state of the art multi-chip packaged components, integrated circuit card assemblies with anti-tamper ("AT") components and electromechanical assemblies, as well as our proprietary process for applying AT protection to mission critical semiconductor components. Our customers, which include military prime contractors and the contract manufacturers who work for them in the United States, Europe and Asia, outsource many of their defense electronic components and systems to us as a result of the combination of our design, development and manufacturing expertise.
Executive Summary
Continuing Operations
Our net sales for the second quarter ended April 4, 2009 increased $2.5 million to $17.1 million, compared to $14.6 million for the second quarter ended March 29, 2008. During the first six months of fiscal 2009, net sales increased $3.7 million to $30.4 million from $26.7 million during the first six months of fiscal 2008. The increase in sales was due to the increase in sales of modules and integrated circuit cards with AT components.
Income from continuing operations for the three months ended April 4, 2009 was $1.2 million, or $0.05 per diluted share, compared to income of $1.3 million, or $0.06 per diluted share, for the same period in fiscal 2008. The slight decrease was primarily due to increased operating expenses and lower interest income, which more than offset the increase in sales and gross profit. Our results were negatively impacted by $0.7 million of expenses associated with our recent discontinued proxy contest and shareholder agreement and the dramatic decrease in interest rates. Income from continuing operations for the six months ended April 4, 2009 was $1.6 million, or $0.07 per diluted share, compared to $1.9 million, or $0.08 per diluted share, for the first half of fiscal 2008. The decrease was also due to increased operating expenses and lower interest income, which more than offset the increase in sales and gross profit. Including the loss in connection with the disposal of the product lines discussed below, net income for the three months ended April 4, 2009 was $0.1 million, or $0.01 per diluted share, compared to a net loss of $1.6 million, or $(0.07) per diluted share, for the same period in fiscal 2008. For the six months ended April 4, 2009, net income was $1.0 million, or $0.04 per diluted share, compared to a net loss of $1.3 million, or $(0.06) per diluted share, for the first half of fiscal 2008.
A key indicator of our future sales is the amount of new orders received compared to current net sales, known as the book-to-bill ratio. During the second quarter ended April 4, 2009, we received new orders of $17.5 million which equates to a book-to-bill ratio of 1.02:1.0. For the first six months of fiscal 2009, we received new orders of $37.0 million, which equates to a book-to-bill ratio of 1.22:1.0. We continue to experience positive bookings and expect a

book-to-bill ratio greater than 1.0:1 for the remainder of the fiscal year. Total AT bookings for the quarter, including bookings for integrated circuit cards with AT components, were $9.3 million. Backlog as of April 4, 2009 was $45.1 million, compared to $44.8 million at the end of the previous quarter. Our gross margins from continuing operations during the three months ended April 4, 2009 increased to 43% from 41% in the same period of fiscal 2008. Gross margins during the six months ended April 4, 2009 increased to 41% from 39% when compared to the same period of fiscal 2008. The increase for the three and six month periods was primarily due to a higher margin product mix and better absorption of our fixed costs due to increased production. Our gross margin historically has been a blend of margins derived from custom and standard microelectronic components and electromechanical assemblies. We have traditionally experienced a range of margins between 40% and 43% depending on the custom versus standard concentration. As we move vertical from a component only house to a business including military grade circuit card assemblies, which may be more price sensitive, we expect overall margins to center around 40%. Discontinued Operations
On March 28, 2008, the Board of Directors authorized the disposal of the Interface Electronics Division ("IED") and the commercial microelectronic product lines. On September 26, 2008, the Board of Directors authorized the disposal of the Display Systems Division ("DSD"). These decisions resulted from an effort to streamline the Company's businesses to focus on product lines where the Company has superior technical knowledge, specialized manufacturing capabilities and an ongoing commitment to research and development. We believe this course of action has and will increase shareholder value and allow us to focus on growing our business. As a result of our decision to dispose of these product lines, we have accounted for them as discontinued operations for all periods presented in the accompanying unaudited consolidated financial statements and the assets and liabilities of the discontinued operations are classified as assets and liabilities held for sale.
On April 3, 2009, we completed the sale of DSD to the U.S. subsidiary of VIA optronics GmbH ("VIA"), a German company. We sold the operating assets of DSD, primarily consisting of inventory, equipment and intellectual property, for approximately $2.3 million. Other non-operating net assets of approximately $0.9 million, consisting primarily of accounts receivable and residual current liabilities, were retained to be settled in the normal course of business. These non-operating net assets are included as part of continuing operations. During the second quarter of fiscal 2009, we also concluded the disposition of our commercial microelectronic product lines. We recorded a loss of $0.7 million, net of tax, on these disposals.
Our discontinued operations generated $5.1 million in revenues in the second quarter of fiscal 2009 compared to $11.7 million in the second quarter of fiscal 2008. The decrease in revenue of $6.6 million, or 56%, was primarily due to the loss of programs from two large tablet PC customers and decreased demand in our commercial microelectronics product line as customers are finding alternative suppliers. Gross profit for the second quarter of fiscal 2009 was $0.9 million, or 17%, compared to $2.0 million, or 17%, for the second quarter of fiscal 2008. Loss from discontinued operations was $0.3 million in the second quarter of fiscal 2009 compared to a loss of $0.7 million in the second quarter of fiscal 2008. The decrease in loss was due to the decrease in gross profit being offset by the decrease in operating expenses as savings were realized from the reductions in force and other cost saving measures implemented, and a tax benefit realized.
For the six months ended April 4, 2009, discontinued operations generated $11.5 million in revenue compared to $22.9 million for the six months ended March 29, 2008. This was primarily due to the decline in sales for the DSD and commercial microelectronic product lines. Gross profit for the first six months of fiscal 2009 was $2.7 million, compared to $3.8 million for the respective period in fiscal 2008. Loss from discontinued operations was $8,000 for the six months ended April 4, 2009, compared to $1.0 million for the six months ended March 29, 2008. The lower loss was due to the decrease in operating expenses, driven by the savings realized from the reductions in force and other cost savings measures, and a tax benefit realized in fiscal 2009 which more than offset the decrease in gross profit. The loss on sale of discontinued operations, net of tax, was $0.7 million for the first six months of fiscal 2009, compared to $2.2 million for the first six months of fiscal 2008. The decrease was due to the final disposition of DSD and the commercial microelectronic product lines in fiscal 2009 being less than the write-off of customer relationships and existing technology intangibles, as well as inventory in fiscal 2008.
We currently expect to complete the disposal of IED by the end of fiscal 2009.

Business Outlook
As part of our renewed focus on defense electronics only, we have developed a plan that builds on our core competencies and expands our reach into the defense and aerospace market. The plan focuses on expanding revenue opportunities in three key areas: Aircraft, Missiles and Ordnance and Net Centric Operations. Programs that require secure communications, guidance of munitions to minimize collateral damage and enhance war fighter safety will be addressed by our GPS based products enhanced by our AT technology. We additionally expect to expand our integrated circuit card assembly product offerings with the addition of radio frequency. Additionally, there are significant opportunities in solid state technology which replaces mechanical storage devices. We are committed to technology and supporting programs that demand cyber security and information assurance in defense platforms. We believe that these areas within the broad defense market are those that will provide stable growth going forward. Shareholder Agreement
On February 4, 2009, we entered into an agreement with Wynnefield Capital, Inc. and its affiliates, and Caiman Partners L.P. and its affiliates ("Shareholder Group"). Under the terms of the agreement, we have expanded our Board of Directors from five to seven members and appointed two new directors: Brian Kahn and Melvin L. Keating. Mr. Kahn joined the Strategic Alternatives Committee, the Compensation Committee and the Corporate Governance and Nominating Committee. Mr. Keating joined the Audit and Operations Review Committees.
In accordance with the agreement, the Board of Directors sought shareholder approval at our 2009 Annual Meeting of Shareholders ("2009 Annual Meeting") to amend our Articles of Incorporation to enable shareholders representing more than 50% of our outstanding shares to amend our Bylaws. In connection with this agreement, the Shareholder Group terminated its proxy solicitation, withdrew its proposed slate of director nominees and agreed to vote all of its shares in favor of all of the Board of Director's director nominees at the 2009 Annual Meeting. The Shareholder Group also agreed to certain standstill provisions until the 2010 Annual Meeting of Shareholders. The Shareholder Group filed an amendment to its Schedule 13D terminating its status as a group on February 11, 2009. The agreement also permits each of the members of the Shareholder Group to acquire up to 9.9% of the then outstanding shares of our Common Stock. Lastly, the agreement provided that we reimburse the Shareholder Group for actual expenses incurred up to $250,000 in connection with the activities relating to the matters in the agreement. Combined with our costs for legal and other outside services in connection with this agreement, our third quarter general and administrative expenses increased approximately $0.7 million. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with generally accepted accounting principles ("GAAP") in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of net sales and expenses during the reporting period. Actual results could differ from those estimates. The most significant accounting estimates inherent in the preparation of our unaudited consolidated financial statements include the following items:
Revenue Recognition
We sell defense electronic products primarily to military prime contractors and the contract manufacturers who work for them. A portion of our products are also sold through distributors or resellers. We recognize revenue on product sales when persuasive evidence of an arrangement with the customer exists, title to the product has passed to the customer (usually occurring at time of shipment), the sales price is fixed or determinable, and collectibility of the related billing is reasonably assured. Advance payments from customers are deferred and recognized when the related products are shipped. Revenue relating to products sold to distributors or resellers who either have return rights or where we have a history of accepting product returns are deferred and recognized when the distributor or reseller sells the product to the end customer. We also provide limited design services pursuant to related customer

purchase orders and generally recognize the associated revenue as such services are performed. However, it may be deferred until certain elements are completed. We may from time to time enter into certain arrangements that contain multiple elements such as performing limited design services accompanied with follow-on manufacturing of related products. We allocate revenue to the elements based on relative fair value, and recognize revenue for each element when there is evidence of an arrangement, delivery has occurred or services have been rendered, the price is fixed or determinable and collectibility is reasonably assured. Arrangements with multiple elements that are not considered separate units of accounting require deferral of revenue until certain other elements have been delivered or the services have been performed. The amount of the revenue recognized is impacted by our judgment as to whether an arrangement includes multiple elements and whether the elements are considered separate units of accounting, as well as management's judgments regarding the fair values of the elements used to determine relative fair values. Excess and Obsolete Inventory
Historically, we have experienced fluctuations in the demand for our products based on cyclical fluctuations in the defense electronics markets. These fluctuations may cause inventory on hand to lose value or become obsolete. In order to present the appropriate inventory value on our financial statements, we identify slow moving or obsolete inventories and record provisions to write down such inventories to net realizable value. These provisions are based on our comparison of the value of inventory on hand against expected future sales. If future sales are less favorable than those projected by management, additional inventory provisions may be required.
Accounts Receivable and Allowance for Doubtful Accounts We record trade accounts receivable at the invoiced amount and they do not bear interest. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. These estimates are based on an analysis of accounts receivable using available information on our customers' financial status and payment histories. Historically, bad debt losses have not differed materially from our estimates. Defined Benefit Plan
We maintain a pension plan for eligible union employees at our Fort Wayne, Indiana facility. To account for the cost of this plan, we make estimates concerning the expected long-term rate of return on plan assets and discount rates to be used to calculate future benefit obligations. Changes in the expected long-term rate of return on plan assets affect the amount of investment income expected to be earned in the future. We base our related estimates using historical data on the rate of return from equities and fixed income investments, as well as projections for future returns on such investments. If the actual returns on plan assets do not equal the estimated amounts, we may have to fund future benefit obligations with additional contributions to the plan. Changes in the discount rate affect the value of the plan's future benefit obligations. A lower discount rate increases the liabilities of the plan because it raises the value of future benefit obligations. This will also cause an increase in pension expense recognized. We use published bond yields to estimate the discount rate used for calculating the value of future benefit obligations. Due to the decrease in the market value of the plan's assets, we contributed $0.5 million to the plan in the third quarter of fiscal 2009. Goodwill
We account for goodwill in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which requires goodwill to be tested for impairment on an annual basis (and more frequently in certain circumstances) and written down when impaired. Goodwill recorded was $1.8 million both at April 4, 2009 and September 27, 2008.
We do not believe a triggering event requiring us to conduct an interim impairment test had occurred as of April 4, 2009. We performed our annual impairment test in the fourth quarter of fiscal 2008, which resulted in no impairment charge. However, the recent drop in our stock price, while consistent with the overall market and our industry, has caused our market capitalization to be below our book value. If this condition continues, it could imply that our goodwill may not be recoverable, thereby requiring an interim impairment test that may result in a non-cash write-down of this asset, which could have a material adverse impact on our unaudited consolidated financial statements.

Stock-Based Compensation Expense
We account for stock-based compensation in accordance with Statement of Accounting Standards ("SFAS") No. 123(R) ("SFAS 123(R)"), which requires that we record the fair value of stock-based compensation awards as an expense. In order to determine the fair value of stock options on the date of grant, the Company applies the Black-Scholes option-pricing model. Inherent in this model are assumptions related to expected stock price volatility, option life, risk-free interest rate and dividend yield. While the risk-free interest rate and dividend yield are less subjective assumptions, typically based on factual data derived from public sources, the expected stock price volatility and option life assumptions require a greater level of judgment. Consequently, expected stock price volatility and option life assumptions are considered critical accounting estimates.
Income Taxes
We account for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes," which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities. Deferred tax assets are recognized, net of any valuation allowance, for deductible temporary differences and net operating loss and tax credit carry forwards. We regularly review our deferred tax assets for recoverability and, if necessary, establish a valuation allowance.
We also follow FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"), which became effective for the Company on September 30, 2007. FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is 50 percent likely of being realized upon ultimate settlement. Results of Operations
The following table sets forth certain financial data expressed as a percentage of net sales:

                                                    Three Months Ended                 Six Months Ended
                                                April 4,         March 29,        April 4,         March 29,
                                                  2009             2008             2009             2008
Net sales                                         100.0 %          100.0 %          100.0 %          100.0 %
Cost of sales                                      57.4 %           59.4 %           58.6 %           60.9 %

Gross profit                                       42.6 %           40.6 %           41.4 %           39.1 %

Operating expenses:
Selling, general and administrative                27.1 %           24.4 %           27.7 %           26.4 %
Research and development                            5.7 %            5.8 %            6.9 %            6.6 %

Total operating expenses                           32.8 %           30.2 %           34.6 %           33.0 %

Operating income                                    9.8 %           10.4 %            6.8 %            6.1 %
Interest income                                     0.3 %            3.1 %            1.0 %            3.8 %

Income from continuing operations before
income taxes                                       10.1 %           13.5 %            7.8 %            9.9 %
Provision for income taxes                         (3.4 %)          (4.4 %)          (2.4 %)          (2.9 %)

Income from continuing operations                   6.7 %            9.1 %            5.4 %            7.0 %


Discontinued operations
Loss from discontinued operations, net of
tax                                                (2.0 %)          (4.5 %)          (0.0 %)          (3.6 %)
Loss on sale of discontinued operations,
net of tax                                         (3.9 %)         (15.3 %)          (2.2 %)          (8.4 %)

Loss from discontinued operations                  (5.9 %)         (19.8 %)          (2.2 %)         (12.0 %)


Net income (loss)                                   0.8 %          (10.7 %)           3.2 %           (5.0 %)

Three Months ended April 4, 2009 compared to the Three Months ended March 29, 2008
Net Sales
Net sales were $17.1 million for the three months ended April 4, 2009, an increase of $2.5 million, or 17%, from $14.6 million for the three months ended March 29, 2008. The increase was primarily due to the increase in sales of military grade circuit card assemblies and modules.
During the three months ended April 4, 2009, Utexam Logistics Ltd accounted for $3.6 million, or 21%, of total net sales. During the three months ended March 29, 2008, Arrow Electronics, Inc. and L3 Communications each accounted for $1.6 million, or 11%, of total net sales. . . .